Preferential transfers and payments and the bankruptcy trustee’s clawback powers

Whether you’re filing for personal bankruptcy or business bankruptcy protection, the process is designed to be as fair as possible to both creditors and debtors.

While that has many meanings, one thing that can cause a lot of problems for both the debtor and others is the issue of preferential payments. Whether you’re filing for personal bankruptcy or bankruptcy for your business, it’s easy to make mistakes that could be deemed “preferential” transfers of money or assets, so learn as much as you can to protect yourself.

What’s a preferential transfer?

Essentially, a preferential transfer is any payment or transfer of money or goods to a creditor shortly before the bankruptcy is filed. For “insiders,” like family or friends or close business partners, the trustee may look back up to 12 months. For other creditors, the trustee may look back 90 days prior to the bankruptcy petition’s filing date.

How do people usually get into trouble with preferential transfers?

Most of the time, there are one or two creditors that a debtor feels guilty about not repaying when it comes time to file for bankruptcy.

Maybe your best friend or your uncle loaned you $10,000 to catch up your bills at some point or start your business. Knowing that you’re about to file bankruptcy soon, you may hurry to repay that loan. Unfortunately, that deprives your other creditors of their fair opportunity to take a cut of that money — and some creditors may have more rights than your friend or relative when it comes to what little assets you have.

What is a trustee’s claw-back powers?

Your bankruptcy trustee can actually reclaim that money from your creditor through a lawsuit. This is known as the trustee’s “claw-back” powers. That can create considerable damage to your relationship with the other party — and complicate your bankruptcy.

Avoiding problems with your bankruptcy starts with understanding both your options and your limitations. That’s why it’s incredibly important to discuss all your finances over with your bankruptcy attorney before you make any big moves.bA